Liability of Head of Company

As a result of the introduction of amendments to the law, the liability of company heads has significantly increased in recent years.

Being a company director means not only being the first person in the company with a high social status and related material benefits, but also being personally liable for the company’s activities to the company founders, creditors and the state generally, thereby being subject to civil, administrative, and criminal liability.

Ekaterina Kalinkina
Head of Branch Office Intercomp Ryazan

Civil liability

The Russian Civil Code, Federal Law On Joint-Stock Companies and Federal Law On Limited Liability Companies provide for the civil liability of company heads. These legislative acts set out that when heads of an organization exercise their rights and perform their duties, they must do so in the interests of the legal entity they represent, reasonably and with due care (Russian Civil Code Article 53(3), Federal Law On Joint-Stock Companies Article 71, Federal Law On Limited Liability Companies Article 44). If a director’s actions (inactions) fail to comply with this principle, such director will be required to cover the losses incurred (direct damage, lost profits).

To bring directors to civil liability, it is necessary to prove:
  • the carelessness and unreasonableness of their actions (inactions);
  • the loss incurred (damage);
  • the director’s fault in the losses incurred;
  • the causal relationship between the director’s actions (inactions) and incurred losses.
Ruling No. 62 of the Plenum of the Supreme Commercial Court of the Russian Federation dated July 30, 2013 On Certain Issues of Compensation for Damages by Persons who Are Part of Legal Entity Bodies (further the “Supreme Commercial Court Ruling”) provides specific rules for application of Article 53(3) of the Russian Civil Code in practice and clarifies vague concepts such as “reasonableness” and “due care” in relation to directors' actions (inactions).

So, according to Paragraph 2 of the Supreme Commercial Court Ruling, director carelessness is deemed proven when:
  • directors act when there is a conflict between their personal interests (interests of director affiliates) and the interests of the legal entity they represent, including when there is actual director interest in transaction conclusion with the legal entity, unless the conflict of interests is disclosed in advance and the director’s actions have been approved as prescribed by law;
  • directors conceal from the shareholders of the legal entity they represent information about a transaction they have concluded (in particular, if such transaction is not specified in the legal entity’s reporting in violation of the law, the legal entity’s bylaws or internal documents) or submit to the shareholders of the legal entity they represent inaccurate information about a transaction;
  • directors enter into a transaction without approval of the legal entity’s relevant bodies as prescribed by law or the legal entity’s bylaws;
  • after termination of their powers, directors hold back from and are reluctant to transfer to the legal entity documents relating to circumstances that have caused adverse consequences for the legal entity;
  • directors knew or should have known upon their performance that their actions (inactions) did not meet the interests of the legal entity they represent. For example, a director enters into a transaction (votes for its approval) on terms that he/she knows are unfavorable for the legal entity he/she represents or with an entity he/she knows cannot fulfill its obligations (fly-by-night company, etc.)
Paragraph 3 of the Supreme Commercial Court Ruling outlines the circumstances under which the unreasonableness of directors’ actions (inactions) are deemed proven, for example, when:
  • directors make a decision without taking into account the information known to them and relevant to the particular situation;
  • directors take no actions before making a decision to obtain the necessary and sufficient information for its adoption, common for business practice in similar circumstances, in particular, if it is proved that a reasonable director would under these circumstances postpone adopting a decision until further information is received;
  • directors enter into a transaction without observing the internal procedures usually required or accepted in their legal entity to conclude similar transactions (for example, consulting with the legal department, accounting department, etc.)
The Supreme Commercial Court Ruling also states that when state commercial courts examine cases, they should assess whether the performance of a particular action pertained or should have pertained to the duties fulfilled by directors in ordinary course of business, in particular, taking into account the scale of operations and the nature of the action.

In addition to compensation for losses (lost profits) for their actions (inactions), directors are also financially liable for the full or partial amount owed to creditors and state agencies in case of company bankruptcy or violation of bankruptcy law. This director liability is known as “secondary liability” as this is an additional liability, and it arises when the company’s assets are not sufficient to satisfy creditors’ claims.

Federal Law No. 488-FZ dated December 28, 2016 Amending Certain Legislative Acts of the Russian Federation (further “Law No. 488-FZ”) entered into force on June 28, 2017 and has tightened the liability of heads of limited liability companies (further “LLC”) for company debts and misconduct. These amendments came about because previously some LLC directors and founders, who were unwilling to fulfill their financial liability to creditors, “ditched” their company on the verge of bankruptcy after having transferred all its business to a new legal entity without notifying creditors that their LLC showed signs of bankruptcy. They also concluded on behalf of their troubled company transactions prohibited when a company is subject to bankruptcy proceedings; they failed to submit tax returns for a long time, waiting for the company to be struck off the State Register of Legal Entities, because in such situation, creditors had first to get the company reinstated in the register before they could collect their debt through bankruptcy proceedings. But since June 28, 2017 creditors have been able to collect the amounts owed by companies struck off the State Register of Legal Entities from their director and other controlling persons, bypassing long and costly bankruptcy proceedings, while directors and shareholders with a stake of 50% in such “ditched” LLC have been subject to additional measures of personal liability, e.g. they are not entitled to (i) set up a new legal entity for three years, (ii) acquire a participatory interest in a company, (iii) head a company. To bring directors to secondary liability, it is nevertheless necessary to first prove that it is their actions (inactions) and not those of the company owners that caused the company bankruptcy.

Western Siberian District Commercial Court Ruling dated May 24, 2017 Case No. А45-2387/2015, Ural District Commercial Court Ruling dated February 13, 2017 Case No. F09-8957/14, Moscow Commercial Court Ruling dated December 07, 2016 Case No. А40-113187/11-95-496 are some of the latest examples of company directors brought to civil liability and secondary liability.

Administrative liability

The Russian Code of Administrative Offenses provides for the administrative liability of company heads. Company heads may be brought to administrative liability if they have committed an administrative offense as a result of their failure or improper performance of their management or administrative duties (Russian Code of Administrative Offenses Article 2.4). It is important to note that when an administrative penalty is imposed on a legal entity for a particular violation, this does not mean that the head of this legal entity will be released from his/her administrative liability for that violation (Russian Code of Administrative Offenses Article 2.1(3)).

Fines are the administrative penalties which are the most commonly provided for and imposed on company heads, while warnings are extremely rarely issued. And as the most severe administrative punishment for directors, disqualification should be addressed separately (Russian Code of Administrative Offenses Article 3.11). Disqualification consists in depriving an individual of the right to hold executive positions as well as otherwise engaging in the management of a legal entity for a period from 6 months to 3 years. This type of punishment can be imposed only by a judge. It should also be noted that the Federal Tax Service maintains a register of disqualified individuals to record such people upon issuance of disqualification court orders and to provide this information to interested parties.

When company heads perform their activities, they do so in various areas (environmental, entrepreneurial, labor, economic, etc.) so administrative liability may arise in any of these areas. Only a few of them are presented in Table 1 below.

Area of activity

Administrative offense

Entrepreneurial activity
  • Engaging in entrepreneurial activity without state registration or without special permit/license (Article 14.1);
  • Sale of goods (other things) the sale of which is restricted or prohibited (Article 14.2);
  • Violation of advertising laws (Article 14.3);
  • Sale of goods, performance of work or provision of services of poor quality or in violation of the requirements of Russian law (Article 14.4);
  • Sale of goods, performance of work or provision of services with no information or no cash registers as set out by law (Article 14.5);
  • Violation of pricing procedure (Article 14.6);
  • Consumer fraud (Article 14.7);
  • Illegal receipt of credit/loan (Article 14.11);
  • Fictitious or deliberate bankruptcy (Article 14.12);
  • Violation of rules for sale of certain types of goods (Article 14.15);
  • Violation of laws on state registration of legal entities and individual entrepreneurs (Article 14.25);
  • Unfair competition (Article 14.33).
Labor law
  • Violation of labor laws and other labor regulations (Article 5.27);
  • Violation of health and safety requirements set out in federal laws and other Russian regulations (Article 5.27.1);
  • Failure to participate in negotiations of collective agreement or to meet the set deadline for its conclusion (Article 5.28);
  • Failure to provide the information necessary for collective negotiations and monitoring compliance with collective agreement (Article 5.29);
  • Unjustified refusal to conclude a collective agreement (Article 5.30).
Finance, taxes and levies
  • Violation of the procedure for working with cash and cash transaction rules, as well as violation of the requirements for use of special bank accounts (Article 15.1);
  • Violation of deadline for registration with tax authorities (Article 15.3);
  • Violation of deadline for submission of information on opening and closing of account in a bank or other credit organization (Article 15.4);
  • Violation of deadline for submission of tax return, insurance contribution payments (Article 15.5);
  • Failure to submit/report the information necessary for tax control (Article 15.6);
  • Violation of deadline for execution of order for transfer of tax (charge), insurance contribution, fine, penalty (Article 15.8);
  • Gross violation of accounting requirements, including financial statements (Article 15.11);
  • Violation of requirements for preparation and holding of general meeting of shareholders, members of limited liability companies and owners of investment units of closed-end investment funds (Article 15.23.1);
  • Violation of Russian currency laws and regulations from currency control agencies (Article 15.25)
Public security
  • Violation of fire safety requirements (Article 20.4);
  • Violation of emergency rules (Article 20.5)

Criminal liability

In addition to civil and administrative liability, company heads may also be brought to criminal liability which is a more serious type of liability provided by the Russian Criminal Code. Russian law does not provide for criminal liability for legal entities so, if an offense is associated with significant damage (or imminent damage) caused by a company to the public, the economy, the state, the head of this company will primarily be liable for this damage. The amount of damage caused determines the penalty that will be imposed on the head as well as the liability measure. For example:
  • For deliberate bankruptcy resulting in damage of up to RUB 1,500,000, an administrative fine from RUB 5,000 to RUB 10,000 will be imposed on the offending company head or disqualification from 1 to 3 years if the head’s actions (inactions) are not criminally punishable acts (Russian Code of Administrative Offenses Article 14.12(2));
  • For deliberate bankruptcy resulting in damage exceeding RUB 1,500,000, the company head will be brought to criminal liability in the form of a fine from RUB 200,000 to RUB 500,000 or the offending head’s salary or other income for a period from 1 to 3 years, or community service for up to 5 years, or imprisonment for up to 6 years with or without a fine of up to RUB 200,000 or the offending head’s salary or other income for a period of up to 18 months (Russian Criminal Code Articles 169,196).
It should be noted that the punishments for the same criminal offense may be applied at the same time so, for example, an offending head could be sentenced to both a fine and freedom restrictions.

Table 2 below shows examples of areas of activity in which company heads’ actions (inactions) could result in criminal liability:

Area of activity

Crime for which liability is provided by the Russian Criminal Code

Entrepreneurial activity
  • Illegal business operations (Article 171);
  • Illegal receipt and disclosure of information constituting trade, tax or banking secret (Article 183);
  • Fictitious bankruptcy (Article 197);
  • Infringement of copyright and related rights (Article 146);
  • Infringement of invention and patent rights (Article 147);
  • Abuse of authority (Article 201);
  • Commercial bribery (Article 204);
  • Restriction of competition (Article 178).
Labor law
  • Unjustified refusal to hire or unfair dismissal of a pregnant woman or a woman with children under the age of 3 (Article 145);
  • Non-payment of wages, pensions, allowances, benefits and other payments (Article 145.1);
  • Violation of health and safety requirements (Article 143).
Finance, taxes and levies
  • Legalization (laundering) of money or other property acquired criminally by other persons (Article 174);
  • Illegal receipt of loan (Article 176);
  • Willful evasion to satisfy accounts payable (Article 177);
  • Pressuring for transaction conclusion or rejection (Article 179);
  • Market manipulation (Article 185.3);
  • Manufacture, storage, transportation or sale of counterfeit money or securities (Article 186);
  • Corporate tax evasion (Article 199);
  • Evading payment of customs duties levied from organizations or individuals (Article 194).